Stock Spin-offs: a reason and a move

Stock spin-offs provide a pool of stocks that can offer the small investors an edge, but it is only just that, an edge.

It's not a sure thing. It's not a buy it and forget it situation. It's not a money machine for the lazy.

One of the my favorite writers on investing and speculating, Gerald Loeb, wrote many years ago that what we are looking for is a reason and a move. All the great fundamentals in the world are worthless if the stock doesn't move. By the same token, just because a stock is going up in price right now doesn't mean that it will keep going up long enough to make any real money.

So the group of stock spin-offs provides an heightened percentage chance of finding companies that are likely to grow their stock prices. Then we need to check out their business fundamentals to winnow out the ones that are being spun off for reasons or in ways that make us not want to be involved. Finally, we need to let the price and volume prove to us that there is indeed something happening in the market's perception of what this one is worth.

Only when the reasons are validated by a move do I want to be getting involved.

Chesapeake Energy (CHK) Planning Spin-off

One of the reasons stock spin-offs are said to outperform the market in their first three years of existence is that they are often sold for reasons unrelated to the actual prospects of the the company which results in an undervaluation of the shares.

In the case of the announcement by Chesapeake Energy that they intend to spin-off their midstreams operations to unlock assets, one may wonder if this one will work that way. It is in the same general industry as the parent, so analysts probably do know how to evaluate it. However, its size may initially work against it as perhaps would the possibility that it will come out as an MLP.

MLP's in similar businesses are certainly not overpriced right now, though some who follow them say they are undervalued and misunderstood. So, maybe just entering this field will put this one in a reasonably good buy range.

Time will tell.